Spread and volatility are not the same thing

[Fairman]

Spread and volatility are not the same thing

It is easy to assume a wide spread means high volatility. Sometimes. Often not.

There are three combinations. Wide spread with high volatility is the news spike. Wide spread with low volatility is thin liquidity, as at rollover or Friday night. Narrow spread with high volatility is the clean trend in a liquid session, and the best environment for scalpers.

Mistaking one for another leads to bad filters. A volatility indicator such as ATR may say the market is calm, and the scalper enters, ignoring that the spread has tripled. The trade has to travel further just to break even, and the strategy's win rate quietly falls.

Better to track both. A spread-to-ATR ratio, for example, tells how much of the typical move is eaten by cost. When that ratio crosses 20 or 30 percent, the market is not worth trading with a tight target.

It takes a small custom indicator or a spreadsheet to calculate. Once built, it often becomes the first thing checked.

What spread-to-range ratio is the cutoff for skipping trades on the current strategy?